As you can see in the above graph, the price of shares in Intact Financial Corporation (IFC) fell $3.96 from a peak of $103.03 on September 1, 2017 and then bottomed out at $99.07 on September 12, 2017. We can also see that the RSI indicator (5) (the relative strength index on trading sessions) fell to 20. Over the last year, this has usually represented a level where prices then rebounded. An investor who believes that the price of IFC could reach $104 in the next two months could try to take advantage of this scenario by buying call options.

Strategy

In this strategy, we will select the call option that gives us the best return if the price of IFC reaches $104 between now and the option’s expiration on November 17, 2017.

We will choose from among the following options:

IFC 171117 C 96 at $4.90

IFC 171117 C 98 at $3.45

IFC 171117 C 100 at $2.25

Position

Comparative Table of Call Options

As we can see in the above table, given these three call options, the best choice is call option IFC 171117 C 100 at $2.25. It provides a potential return of 78% if IFC attains our target price of $104 on November 17, 2017. Therefore, we will carry out the following transaction:

Purchase of 10 call option contracts IFC 171117 C 100 at $2.25

Profit and loss diagram

Potential profit = $1.75 per share, for a total amount of $1,750

Potential loss = $2.25 per share, for a total amount of $2,250

Intervention

Even though the target price for shares of IFC is $104, our potential profit is tied to the target price of $4 on the call options. As a result, as soon as the price of the call options reaches $4, we will liquidate this position, even if IFC has not yet reached $104.

In order to avoid incurring the maximum loss, we could liquidate the position if the price of IFC closes under $98.

Good luck with your trading, and have a good week!

The strategies presented in this blog are for information and training purposes only, and should not be interpreted as recommendations to buy or sell any security. As always, you should ensure that you are comfortable with the proposed scenarios and ready to assume all the risks before implementing an option strategy.

Martin Noël earned an MBA in Financial Services from UQÀM in 2003. That same year, he was awarded the Fellow of the Institute of Canadian Bankers and a Silver Medal for his remarkable efforts in the Professional Banking Program. Martin began his career in the derivatives field in 1983 as an options market maker for options, on the floor at the Montréal Exchange and for various brokerage firms. He later worked as an options specialist and then went on to become an independent trader. In 1996, Mr. Noël joined the Montréal Exchange as the options market manager, a role that saw him contributing to the development of the Canadian options market. In 2001, he helped found the Montréal Exchange’s Derivatives Institute, where he acted as an educational advisor. Since 2005, Martin has been an instructor at UQÀM, teaching a graduate course on derivatives. Since May 2009, he has dedicated himself full-time to his position as the president of CORPORATION FINANCIÈRE MONÉTIS, a professional trading and financial communications firm. Martin regularly assists with issues related to options at the Montréal Exchange.